One of the ultra-low-risk strategies developed by BCI in 2o20 involved selling weekly 10-Delta cash-secured puts. This created a greater than 90% probability that the puts would not be exercised (expire in-the-money or with intrinsic-value). Since 2020 – 2021 represented an unusually low interest rate environment, annualized returns of 8% – 15 % looked pretty darn good. Since our contract obligations are for 5 days, Monday holidays caused a significant decline in that week’s annualized returns. No big deal since it’s only a few weeks per year. This article will offer a solution, with pros and cons, on circumnavigating this Monday holiday issue as it relates to this strategy.
Observations on rolling weekly puts on expiration Friday
I have noticed that by rolling the puts between 11 AM ET and 1 PM ET on expiration Friday to the following weekly expiration Friday, the annualized returns will not be impacted to any significant extent. The downside is that we are now undertaking weekend risk which is not the case if we simply trade between Monday and Friday.
Real-life example with ETSY taken from one of my portfolios
- 8/30/2021: Sell 2 x $200.00 9/3/2021 puts at $0.42
- 9/3/2021: ETSY trading at $220.38 at 1 PM ET
- 9/3/2021: The cost-to-close the 9/3/2021 $200.00 put was $0.04 per-share or $8.00 for the 2 contracts
- 9/3/2021: The 9/10/2021 $202.50 put (Delta of -0.9) generated $0.47 per-share
Brokerage account statement showing the ETSY put options being rolled out-and-up retaining the 10-Delta status
Annualized Calculations for the 9/3/2021 contract expiration ($200.00 put)
[($0.42/ ($200.00 – $0.42)] x 52 = 10.94%
Annualized Rolling calculations for the 9/10/2021 contract expiration ($202.50 put)
[($0.47 – $0.04)/ $($202.50 – $0.47)] x 52 = 11.07%
There was virtually no difference between the original annualized returns and that the rolling returns despite 1 less day in the contract. Certainly, one trade does not make a scientific study, but I’ve done this a few dozen times (as of writing this article in September 2021) and all had similar results. The advantage of this rolling is higher returns for the 4-day week and the disadvantage is the weekend risk incurred. Since holiday weekends are usually quiet, the risk is limited but present, nonetheless.
For more information on selling cash-secured puts
Market now deeply oversold
I created a chart showing how the recent decline in the stock market (S&P 500) has moved the market, technically, into oversold territory. The chart below shows the stochastic oscillator, a momentum indicator, to be in oversold territory (below the 20%- far right circle). The last 4 times this occurred, the market immediately rebounded:
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
I am using IV. Think or Swim calculates the probability OTM or ITM, so all needed is to select a strike that corresponds to the probability I want. I guess you have created a probability trader. My trades are at 75% OTM. This is the second week using this strategy and it is working well. ROO on QQQ trades have returned around 35% annualized. This week I have collected about $2300, on 11 call contracts on stocks and 4 PUT contracts on QQQ. This doesn’t include $800 I made on the sale of QQQ shares I was assigned last Friday, but the jury is still out on whether QQQ shares will be assigned today. I want to thank you for getting me involved in options trading and being an excellent teacher.
1.BCI-only free webinar: February 17, 2022, at 8 PM ET
Introducing a New Exit Strategy and Exit Strategy Term
Registration link to follow
Exit strategy implementation is a critical aspect of successful covered call writing and put-selling strategies. Over the past 15 years, the BCI team has been creating rules and guidelines regarding our trade entries and adjustments while always seeking to enhance the opportunities to elevate our returns to the highest possible levels.
This webinar will introduce a new exit strategy and exit strategy term that can be applied to both covered call writing and selling cash-secured puts. We have also integrated this new exit strategy into our upcoming BCI Trade Management System which includes our new Trade Management Calculator. This new tool is the first of its kind anywhere and will be available to our BCI community during the 1st quarter, 2022. You have been asking for a trading log that allows us to both enter, adjust and calculate final returns and now you will have it.
This presentation will include scenarios when the exit strategy can be applied, how to apply it and show calculation results using both stocks and ETFs for both calls and puts.
Let’s learn from each other and use this information to become the best and most elite of all option traders.
2.Long Island Stock Investors Meetup Group
Stock Options: How to Use Implied Volatility to Determine Strike Selection
Creating 84% probability successful trades for covered call writing and selling cash-secured puts
Wednesday April 13, 2022
7:30 PM ET – 9:30 PM ET
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
If I am first starting out and want to create a “call-writing” portfolio, I should:
a) Buy 5 diversified Dow stocks that have a good RSI and a decent monthly premium;
b) Write monthly calls on them, keeping roughly 7K on the side should I need to buy back the calls;
c) Should any of these stocks lose its momentum and/or premium, sell that stock, and then replace it with another Dow stock that would work better.
a): Yes, to be properly diversified with stocks, we want at least 5 different stocks, preferably in 5 different industry segments. If we use exchange-traded funds (ETFs), we can use less securities. The premium goals will vary from investor-to-investor. For monthlys, most fall into the 1% – 4% for the initial time-value return goal range. If using Dow 30 stocks, 1% – 3% is a reasonable monthly initial time-value return goal range.
b): Monthly calls is my preference in most of my portfolios, but I do use some weekly strategies. Both will work well after mastering the 3 required skills (stock selection, option selection and position management). The cash reserve for exit strategies should be 2% – 4% of portfolio net worth.
c): Once our trades are initiated, we manage them by the rules and guidelines of the BCI exit strategy arsenal. These are detailed in my books and online video courses. An overview is given in our free beginner’s tutorial:
The education will pay off in the long run.
On 12 /7/21 I sold four contracts of the December 17 $50 puts on block (BLOK).
On 12 /20/21 BLOK was put to me at $50. I immediately sold the January 21 $48 call options for $1.20.
10 days later on 12 30/21 I bought to close that call option for $.28.
On 12 31/21 I received a special dividend of $5.75 (I was not expecting this and as you have explained in the past the stock price was adjusted accordingly).
I waited a few days in an attempt to hit a double, the stock continued To decline and on January 6, 2022 I sold four contracts of the January 21 $40 calls for $.65.
On January 19, 2022 I bought to close those same options for six cents. At this time my cost basis is approximately 41.64 and the stock is sitting at around $35.
My question to you is should I convert this dead money into cash profits? Should I immediately sell a covered call near the money. Or should I wait for a recovery and sell a call at that time? What would you do in this situation?
As a side question. What would’ve happened if I had unwittingly sold a put option shortly before the stock price was adjusted down? As I mentioned I was not aware of a special dividend on the horizon.
It appears this trade went south while you were in the covered call position. You did a good job with the BTC and STO position management trades, but we also must evaluate the performance of our underlying securities compared to the S&P 500. Is the share price decline a market or specific company issue?
I created a 1-month comparison chart of the stock and the benchmark that speaks for itself.
When we are faced with selling or keeping an under-performing stock or ETF, we ask ourselves this question: “Would I buy this stock today with the information at hand?” And follow it up with “Or, would my cash be best placed with another security” This will guide us to the best decision. There will not always be a great solution but there will always be a best solution.
Now, if we sold a put prior to the special 1-time cash dividend, the Options Clearing Corporation will adjust the strike prices to make sure all buyers and sellers of calls and puts are made whole. We suffer no damages nor enjoy any benefits.
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My two last options cycles were a total disaster.
Almost all of my monthly CC trades were awful, and I sold the shares at high losses despite mitigation roll-downs.
One whole year’s hard work was lost in two months. Total (15%)
I am frustrated and disappointed with my poor management of the “Omicron” market crash.
The biggest mistake was waiting too long to roll down or liquidate several losing trades.
Now I am back to square 1 and need to recover from the shock before reinvesting.
I feel your pain … we all do. With the market down over 7% year-to-date, all of our portfolios have suffered. The question is where will it go from here?
I have made my position clear in the recent premium stock report. Each investor must take the path that aligns with their personal risk-tolerance. There is nothing wrong with waiting and taking action when that comfort level returns.
In March 2020, the market declined > 30% (COVID-19). In 2008, the market was down 37%. Both events shook a lot of retail investors out of the market. I was out from October 2008 to March 2009. When market conditions appear dire or too good to be true, there will always be a reversion to the mean which is an appreciating market. There is nothing wrong with taking a break as long as we monitor market conditions so we can take advantage of the recovery.
What I have learned in the past is that when such severe sell-offs happens it’s better to prefer share price appreciation instead of chasing the option premium. The volatility is high and even selling far OTM calls can give the seller some decent premiums. I think the key here is just let the markets to rebound (it may take a few months at least) and don’t get too emotional trying to make the money back as fast as possible. Also temporary switching from individual stocks to indices selling far OTM calls and generating some cash flow when waiting might make sense too, or, if individual stocks are chosen, go for the ‘blue chips’ as they tend to be less volatile and usually will rebound faster than more risky small caps.
Thank you for your great remarks.
I will certainly follow your recommendations as I wish to recover my losses gradually and safely.
A question about the “Ellman Calculator”. When you are holding a stock for several months and selling covered calls on them, when you are carrying the stock over to the next month, what do you put for the stock’s price per share? Is that the current price, or would that be your cost basis?
We use the lower of current market value or the near-month strike if it is in-the-money. If we sold a $50.00 call and the stock is trading at $48.00 at expiration, we use $48.00. If we sold a $50.00 call and the stock is trading at $52.00 at expiration and we roll the option, we use $50.00.
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 01/21/22.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Barry and The Blue Collar Investor Team
Thank you, Alan, for your kind words.
I will watch the market each day and be prepared to return as soon as I feel safer. I believe it is directly related to the pandemic reduction.
So your saying if I have overall invested 200,000 in purchasing five different DOW stocks, I should be looking to collect roughly 2,000 per month on the premiums from call-writing?
The short answer is yes, but there is so much more to consider before placing our covered call trades.
When selling near-the-money monthly covered calls on Dow 30 stocks, we can expect and initial time-value return between 1% and 2% or $2000.00 to $4000.00 per-month on a $200,000.00 investment. That money is ours to keep no matter what transpires.
However, a covered call trade involves 2 positions. We are long the stock (own it) and short the call (sold it). If share price declines below our breakeven price point, we start to lose money. The recent market decline reflects just that.
Also, covered calls cap our upside when share price moves above our out-of-the-money strikes.
What these facts tell us is that we must master the 3-required skills of stock selection, option selection and position management to maximize our profit results that, in the long-term, will give us the opportunity to beat the market consistently. The reason is that when we sell options, we are lowering our cost-basis.
Bottom line: Yes, we can expect a minimum of a 1% monthly return when selling near-the-money covered calls. However, we must manage the long stock position as well as the short call before during and after our trades are entered and expire.
Good morning sir,
I’m almost done with my book Selling Cash Secured Puts. I’m enjoying this book just as much as my first book. But I am curious as to how generally your strategy towards Calls & Puts works in a down market. For the most part, I’ve been navigating selling Covered Calls & Puts in an upward trending or at least neutral market. So what happens now that we seem to be in correction territory given the downward trend of the last week +?
Whether the market is up or down substantially, there will always be a reversion to the mean. The challenge for investors is to determine when that will occur.
One of the reasons I was attracted to covered call writing and selling cash-secured puts is that we can craft our approach to current market conditions and re-evaluate our bullish/bearish assumptions on a frequent basis.
Here are some of the approaches we can take in a declining market:
Deep OTM puts
The PCP strategy (put-call-put or wheel)
10-Delta weekly put strategy
Use lower IV securities
Lower our initial time-value return goal range
IV trading range approach
Inverse ETFs (extreme bear markets like 2008)
In an extreme bull market, we would take a completely different approach.
Crafting our strategy approach to current market conditions, along with lowering our cost-basis when we sell options, are reasons why we have the opportunity to beat the market on a consistent basis.
I am a current member…
I wasn’t sure if this was on the web site or not and/ or whether you’ve ever talked about it.
I tend to trade stocks on earnings where there is a large gap on large volume. Historically, I’ve found on growth stocks with a base that a pop of volume that is 3x to 5x normal on a 5% or higher gap; tend to have post earning run.
This morning I was watching as IBM, AXP, LMT and a few others have had nice upside (4% to 7%) on what is currently 2x normal volume and will probably be 3x by end of day. These are not the fast moving growth stocks I’d trade but it does appear that if I sold puts at or just below their current breakout levels – that would be exited before their next earnings reports – there is a good 20% to 30% opportunity. See screenshot.
Similarly, I could buy LMT for example and sell a call pretty much where the stock is now, and have 25% upside.
Wondering if you’ve employed this strategy – have anything to share about it (articles) and whether taking these with 4% or 5% downside risk (pretty much what they are up today) plus 25% potential – is typically a worthwhile trade?
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I am in agreement with your strategy approach, to an extent.
First, we avoid having option positions in place through an earnings report … perfect.
Waiting for the report to pass and embrace those that beat consensus … I’m in with that one as well.
Selling call options after the post-earnings volatility subsides … nothing wrong with that.
The one adjustment I would consider is not to base my “moneyness” decision (only OTM) solely on the projected post-earnings run-up but also factor in overall market assessment.
As an example, in the current market environment, I may not go all-in for OTM calls despite the “beats” I would consider a certain percentage (right now 50%, for me) of ITM call strikes just to be defensive in this higher volatility market environment.
Overall, favoring companies that have outstanding fundamentals, based on earnings reports “beats”, is an approach that aligns perfectly with the BCI methodology.
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report.
This week’s report includes 27 ETFs that, not only have out-performed the S&P 500 in one- and three-month timeframes but are also in positive territory over the past one month.
For your convenience, here is the link to login to the premium site:
NOT A PREMIUM MEMBER? Check out this link:
Alan and the BCI team
Do you still use the 20%/10% exit strategy for the 10 Delta weekly puts? or Do you exit and roll up when you can achieve a net premium with another 10 Delta puts with a higher strike price?
Both. Most investors cannot be at their computer screen to monitor trades multiple times per day so leaving the 10% guideline in place for our weekly 10-Delta put trades will partially automate the process for us.
For those who can and are inclined to monitor the trades on a frequent basis, the 10% guideline is not necessary, and we simply look for opportunities to roll-up with an option credit while still retaining our 10-Delta requirement.
Dear Allan. Good morning. If you have time to monitor the 10-Delta put trade, the objective is to generate a net credit in the Roll Up (attractive enough). In this case, the BTC of the Put may be higher than the 10% guideline. For example, I checked your previous articles with AAPL and ETSY and it seems that the BTC is variable from 10, 25% or 45%. However, the net credit premium of the Roll Up is still attractive (need to check the commissions of your particular broker). I think the measure should the amount return should be made on a case by case basis and it is hard to establish a guideline for attractive return for the Roll Up. Do you agree? Overall, we should increase the initial ROO of the weekly trade.
Yes, I agree. If we have time to monitor our trades during the course of market hours, we seek to generate additional time-value credit while still retaining our 10-Delta requirement. As share value accelerates, we check the option-chain to determine if and when these opportunities present themselves.
A few months ago, I sold a 10-Delta monthly (no Weeklys available) put with INMD. At the time, share value was appreciating and I was able to monitor the trade and ended up rolling-up 5 times for as total of 6 income streams in the same contract month with the final put strike expiring worthless.
Thanks Alan for the great explanation.